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Berlin poised to unveil ‘bad bank’ plan

Berlin will on Wednesday adopt a “bad bank” programme to purge domestic institutions of their toxic assets in its latest bid to handle the crisis of confidence that is battering the financial sector and weakening Europe’s largest economy.

The draft bill proposes the establishment of various, institute-specific bad banks. A bank participating in the scheme will be able to ring-fence its least liquid assets, and the underlying risks, for up to two decades.

These special-purpose vehicles will, in return, issue the bank with a bond whose value would be backstopped by Soffin, the federal authority that manages the government’s bank rescue fund created last October.

Comment: Lex

There are three problems with Berlin’s toxic asset scheme. First, there is no incentive for a lender to remove its bad loans if it still has to shell out the difference if their value then declines. Second, there is no point in a bank paying extra for this. Finally, the scheme being a voluntary one, virtually rules out in the participation of a private sector bank.